Applied Science University

Faculty of Engineering
Mechanical and Industrial Engineering
Engineering Economy [CH1 +CH2+ CH3]

Problems #1
P1. You borrow $500 from a family member and agree to pay it back in 6 months. Because you
are part of the family, you are only being charged simple interest at the rate of 0.5% per month.
How much will you owe after 6 months? How much is the interest?

Answer: $515 , $15

P2. RKI Instruments borrowed $3,500,000 from a private equity firm for expansion of its
manufacturing facility for making carbon monoxide monitors/controllers. The company repaid
the loan after 1 year with a single payment of $3,885,000. What was the interest rate on the loan?

Answer: 11% per year

P3. To finance a new product line, a company that makes high-temperature ball bearings
borrowed $1.8 million at 10% per year interest. If the company repaid the loan in a lump sum
amount after 2 years, what was (a) the amount of the payment and (b) the amount of interest?

Answer: (a) $2,178,000 (b) $378,000

P4. What is the future equivalent of $1,000 invested at 6% simple interest per year for 3½ years?

Answer: $1,210

P5. An investment of $10,000 can be made that will produce uniform annual revenue of $5,310
for five years and then have a market (recovery) value of $2,000 at year five. Annual expenses
will be $3,000 each year for operating and maintaining the project. Draw a cash-flow diagram
for the five-year life of the project. Use the corporation’s viewpoint.

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P6. An investor (owner) has an option to purchase a tract of land that will be worth $10,000 in
six years. If the value of the land increases at 8% each year, how much should the investor be
willing to pay now for this property?

Answer: $6,302.

P7. The average price of gasoline was given as $2.31 in 2005. We computed the average annual
rate of increase in the price of gasoline to be 6.62%. If we assume that the price of gasoline will
continue to inflate at this rate, how long will it be before we are paying $5.00 per gallon?

Answer: 12.05 years.

P8. A recent government study reported that a college degree is worth an extra $23,000 per year
in income compared to what a high-school graduate makes. If the interest rate is 6% per year and
you work for 40 years, what is the future compound amount of this extra income?

Answer: $3,559,526

P9. You borrow $15,000 from your credit union to purchase a used car. The interest rate on your
loan is 0.25% per month and you will make a total of 36 monthly payments. What is your
monthly payment?

Answer: $436.50 per month

P10. Your company has a $100,000 loan for a new security system it just bought. The annual
payment is $8,880 and the interest rate is 8% per year for 30 years. Your company decides that it
can afford to pay $10,000 per year. After how many payments (years) will the loan be paid off?

Answer: 21 years

P11. The car you want to buy will cost $60,000 in eight years. You are going to put aside $6,000
each year (for eight years) to save for this. At what interest rate must you invest your money to
achieve your goal of having enough to purchase the car after eight years?

Answer: 6.28% per year

P12. Suppose that a father, on the day his son is born, wishes to determine what lump amount
would have to be paid into an account with interest of 12% per year to provide withdrawals of
$2,000 on each of the son’s 18th, 19th, 20th, and 21st birthdays.

Answer: $884.46

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P13. The company spent $100 for the first year, $200 for the second year, $500 for the third
year, and $400 for each year from the fourth through the eighth. If the annual interest rate is
20%. Find (a) the present worth (b) the future worth (c) the annual equivalent value.

Answer: (a) $1,203.82. (b) $5,176.19. (c) $313.73.

P14. Suppose that we have cash flows as follows:

Calculate their present worth and equivalent annual payment at i = 15% per year.

Answer: $19,050, $6,673.70.

P15. What value of T makes these two cash flow diagrams (see Figure) economically equivalent
at 8% annual interest?

Answer: T = $3979.37

P16. Maintenance expenses for a bridge on the Ohio River are estimated to be $20,000 per year
for the first 8 years, followed by two separate $100,000 expenditures in years 12 and 18. The
expected life of the bridge is 30 years. If i = 6% per year, what is the equivalent uniform annual
expense over the entire 30-year period?

Answer: -$15,168

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P17.For Figure shown below if the annual interest rate is 12%. What is the present equivalent
value?

Answer: $4,684.51

P18. Revenue from the sale of ergonomic hand tools was $300,000 in years 1 through 4 and
$465,000 in years 5 through 9. Determine the equivalent annual revenue in years 1 through 9 at
an interest rate of 10% per year.

Answer: $374,181 per year

P19. Find the present worth in year 0 for the cash flows shown. Let i = 10% per year.

Answer: $-536

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